Artemis UK Special Situations Fund update

Andy Gray and Henry Flockhart, managers of the Artemis UK Special Situations Fund, report on the fund over the quarter to 30 June 2025.

Andy Gray

Source for all information: Artemis as at 30 June 2025, unless otherwise stated.

Review of the quarter to 30 June 2025

Potential changes in global terms of trade have dominated headlines and market commentary over the last quarter. The announcement of ‘Liberation Day’ tariffs by President Trump on 2 April led to a sharp initial fall in markets. This correction was short-lived, however, and a 90-day pause to allow time to negotiate trade deals led to a subsequent recovery in share prices.  

In the UK, companies have been facing additional National Insurance costs and another material rise in the minimum wage. Although that has dampened profit growth, we think management teams have done a good job in mitigating the impact and they now have a well-established playbook, having had to deal with significant cost pressures and inflation in the last few years.

Operational momentum remains strong in the businesses we own, as evidenced by an upbeat reporting season that has been rewarded by positive share price performance from many of our holdings.

Over the quarter, the fund outperformed its benchmark, rising by 14.0% compared with 4.4% from the FTSE All-Share index on a total return basis.  

  Three months Six months One year  Three years  Five years
Artemis UK Special Situations Fund 14.0% 14.2% 18.1% 53.6% 86.9% 
FTSE All-Share TR 4.4% 9.1% 11.2% 35.5% 67.3% 
IA UK All Companies NR 7.5% 7.4% 8.5% 29.4% 50.8% 
Past performance is not a guide to the future. Source: Lipper Limited/Artemis as at 30 June 2025 for class I accumulation GBP. All figures show total returns with dividends and/or income reinvested, net of all charges. Performance does not take account of any costs incurred when investors buy or sell the fund. Returns may vary as a result of currency fluctuations if the investor's currency is different to that of the class. Classes may have charges or a hedging approach different from those in the IA sector benchmark.

Contributors

  • A new chief executive at Entain is driving improvements in the business, with the UK and US operations performing ahead of expectations. This builds credibility in the medium-term profit target of its US joint venture, BetMGM.
  • Babcock has raised its medium-term margin target from 8% to more than 9%. With defence budgets set to rise faster than GDP and the UK’s Strategic Defence Review pointing to submarine and nuclear deterrent investment as key priorities for the government, Babcock's mid-single digit revenue-growth guidance looks well underpinned and set to be maintained for many years. It announced a surprise £200m buyback, with results underscoring how far the business has progressed since fears of a rescue rights issue in the early days of the management team’s tenure.
  • FirstGroup continues to increase margins in its UK bus division and expects earnings growth in the year ahead despite headwinds from the government’s nationalisation of its rail franchise. It announced a new £50m buyback.
  • We retain significant exposure to the UK consumer through companies including Jet2, Mitchells & Butlers, DFS and Dunelm. All continue to trade well.

Detractors

There were no material underperformers in the quarter.

Activity

We took advantage of volatility in April to add to holdings such as Barclays, Barratt Redrow and Entain, which fell sharply despite not being materially affected by tariffs.

We continue to manage the portfolio actively, selling our positions in Tesco and Imperial Brands and taking sizeable profits in Babcock and FirstGroup. All have performed well and re-rated, so we recycled the capital into companies that offer, in our view, more prospective upside. These included several new holdings in the quarter:

  • Retailer Wickes de-rated during a period of difficult trading post the Covid lockdown-induced pull-forward of home-improvement spending. However, management set about investing in the proposition and modernising the customer experience during this time. We see significant volume recovery potential after years of industry decline, as well as additional market share gains.
  • Future is a magazine and website media business that owns titles such as TechRadar, Homes & Gardens and Marie Claire. Future also owns the price-comparison website Go.Compare. Concerns over the impact of generative-AI platforms, such as ChatGPT, have led it to fall to a low valuation. We believe customers and cashflows will prove to be more resilient.
  • Marks & Spencer has struggled for many years and lost market share against competitors such as Next. More recently it has been the victim of a cyberattack that led to the suspension of online orders. The share price correction was over-done in our view and the incident masks underlying improvements in brand perception: M&S is fashionable again. We see opportunities for further investment into value and quality, leading to sustained volume growth and therefore sustained earnings-growth potential in the years ahead.

Outlook

The UK looks likely to be a relative winner from US tariffs. Ours is primarily a service-based economy and, with the trade deal signed off, a tariff rate of 10% looks comparatively low even before significant exemptions that are also in place. The company management teams we speak to are confident in their ability to mitigate the impact, with their relative competitiveness improved if anything.

On the domestic front, we remain more positive than most on the UK consumer. In aggregate, they have been saving consistently since Covid and, unlike in the US, these savings remain largely unspent. This represents pent-up demand in the economy. Consumer confidence remains muted but another explanation for the high savings rate is that interest rates remain high. While this is good for savers, restrictive rates are effectively acting as a handbrake on the economy. We expect interest rates to be cut further with a weak dollar and falling oil prices both easing concerns over inflation.

The UK market has performed well in recent years, but valuations are still attractive. The UK market remains cheap compared with other international markets and we would expect that gap to close as UK growth and inflation converge with other major economies. A weak dollar also lessens the appeal of US assets for domestic investors.

Overall, we are still seeing many opportunities to buy good companies with strong operating momentum at attractive valuations. We have recycled capital to preserve the value credentials of the fund, so we remain optimistic about the potential for further strong returns.

Benchmarks: FTSE All-Share Index TR; A widely-used indicator of the performance of the UK stockmarket, in which the fund invests. IA UK All Companies NR; A group of other asset managers’ funds that invest in similar asset types as this fund, collated by the Investment Association. These act as ’comparator benchmarks’ against which the fund’s performance can be compared. Management of the fund is not restricted by these benchmarks.

Andy Gray

Manages:

‘UK special situations‘ strategy

Andy works alongside Henry Flockhart managing Artemis’ ‘UK special situations’ strategy.

View Profile

Henry Flockhart

Manages:

‘UK special situations‘ strategy

Henry works with Andy Gray managing Artemis’ ‘UK special situations’ strategy.

View Profile

Investment in a fund concerns the acquisition of units/shares in the fund and not in the underlying assets of the fund.

Reference to specific shares or companies should not be taken as advice or a recommendation to invest in them.

For information on sustainability-related aspects of a fund, visit the relevant fund page on this website.

For information about Artemis’ fund structures and registration status, visit artemisfunds.com/fund-structures

Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness.

Any statements are based on Artemis’ current opinions and are subject to change without notice. They are not intended to provide investment advice and should not be construed as a recommendation.

Third parties (including FTSE and Morningstar) whose data may be included in this document do not accept any liability for errors or omissions. For information, visit artemisfunds.com/third-party-data.

Important information
The intention of Artemis’ ‘investment insights’ articles is to present objective news, information, data and guidance on finance topics drawn from a diverse collection of sources. Content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security or investment by Artemis or any third-party. Potential investors should consider the need for independent financial advice. Any research or analysis has been procured by Artemis for its own use and may be acted on in that connection. The contents of articles are based on sources of information believed to be reliable; however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current opinions, expectations and projections. Articles are provided to you only incidentally, and any opinions expressed are subject to change without notice. The source for all data is Artemis, unless stated otherwise. The value of an investment, and any income from it, can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested.